Trading Covered Calls on the US Market. Why I believe it is the opportunity of a lifetime!

Covered Call Trading OpportunityManaging the balance between Risk and Reward is the blight of every trader and investor. The Covered Call strategy, or Buy Write, is one of the key strategies professionals use to manage Risk. And the US markets provide us with one of the most dynamic environments that are ideally suited for the Covered Call strategy. We call this strategy a Passive Income strategy, and one that every investor should be fully aware of.

Covered Call Strategy

None of us want to lose money in the markets, while we expect every trade we make to produce exceptional returns. One of the key strategies in managing the balance between Risk and Reward is the Covered Call, also known as the Buy Write. It is a lower Risk strategy that provides some downside Risk Management, while at the same time provides a premium cashflow, or as we like to refer to it, a Passive Income. And it is a strategy that just about anyone can implement! With an easily understood approach, this strategy has become one of the most popular strategies for Mums and Dads and Self Managed Superannuation Funds. But to date, the focus for Australian investors has been the ASX. Trading this strategy on the US markets is actually an extremely easy process that simply requires the right broker to implement.

Consistant Returns

Having been involved in the markets for more than 14 years, I’ve had the opportunity to manage funds and trade on almost everything, from stocks, options, CFD’s, Exchange Traded Funds (ETFs), Futures and Foreign Exchange. As a professional advisor, I have observed that the average “Mum & Dad” investor/trader is looking for the quick gains to make them rich, starting with small amounts of capital and fearful of losing anything to the markets. But it is consistency in returns that is the real key to creating wealth. For the first time trader/investor who makes a loss on their first trade and then leaves the markets in fear of losing capital, it is usually the choice of the wrong strategy or poor advice that results in never again looking to the markets as a means of creating financial wealth.

What’s Involved with Covered Calls

For the last 10 years, I’ve managed funds with a strategy that (in my opinion) is the cornerstone to wealth creation in the stock market. It’s a strategy that doesn’t require a strong directional movement, doesn’t require watching a live screen all day long, and if implemented professionally, can have clean, consistent returns for a passive income.

If you are unfamiliar with this strategy, you might just be a little excited in what I have to say. But let me first give you a very simple and quick explanation of what is involved:

  • On a monthly basis, we look for a stock position/s that we can sell Call options against to create a passive income.
  • The goal of the strategy is to find a stock that will trade sideways or slightly upwards. But if it falls slightly, we may still have potential to be profitable (depending how the strategy was set up on entry)
  • The premium received for selling the Call option provides a passive income, or cash flow. We look to re-sell every month and have consistency in producing a regular income.
  • This premium offsets some of the purchase price of the shares. Theoretically, if we did this every month over time, we could eventually pay off the original cost of buying those shares.

Traditionally, investors buy stock for two reasons: 1) capital gain in the share price, and 2) dividends, which are a share in the company’s profit. This leaves the investor susceptible to falling markets, poor company performance and tax implications for selling long-term investments.

The Modern Investor

The modern investor has the ability to avoid much of the negativity associated with long-term buy and hold strategies. Instead, treating shares as an asset from which to generate cashflow.

The ASX Comparison

The Australian Stock Exchange (ASX) provides a comparison of the ASX200 index and the S&P ASX Buy Write index, as per the accompanying graph.

Covered Call ASX200 Comparison Chart

Covered Call ASX200 Comparison Chart

Here we can see that the Buy Write index (black line) outperforms the broader market between 1992 and 2006. Encompassing not only strong upwards markets, but also Bear markets or market crashes.

From this graph, I am sure you can see that the potential for return is stronger from the Covered Call (Buy Write) strategy than merely just holding shares.

Covered Calls and ETF

But what I find even more exciting is using this strategy on Stocks and Exchange Traded Funds (ETFs) on the US markets. I know many readers might think it too risky to consider investing in the US compared to Australia, but it has never been easier or more secure to do so, than today.

Why do I think the US markets and the Covered Call strategy are an opportunity of a lifetime?

  • Firstly, using an online platform through an ASX participating broker, such as Halifax Investment Services, means you have legal rights and a regulated system. You have staff who operate during normal work hours who can assist and provide information as required.
  • Brokerage fees are far cheaper using an online platform compared to a full service broker. Especially one where you are buying/selling in the US, which incurs a higher fee. For example; the Trader Work Station (TWS) provided by Halifax has a minimum brokerage cost for US stocks of just $13.50 per transaction.
  • The Liquidity in the US markets is second to none. There is so much volume and depth of buyers and sellers, especially in the top 500 companies (S&P500 listed stocks) that there should never really be a reason why you cannot get an order filled to buy or sell.
  • Depth of optionable stocks is far greater than the Australian markets, with a broad economy that has various industries to choose from. Compare that to Australia, where Mining and Banking are the two key sectors, with maybe less than a dozen companies to consider for this strategy.
  • The time-frame for decision making allows for analysis and evaluation, and deters from watching screens throughout the trading day. We can analyse the US markets, stocks/options and company’s during our daylight hours, placing trades to be entered/exited during the night. Easing the pressure to make quick decisions and watching prices too closely during market open times.

 

Lower Risk Strategy

In summary, not only is the Covered Call strategy a lower Risk approach to working the markets compared to just Buying and holding indefinitely, the US markets provide us with depth of liquidity, efficiency in costs and a detached time-frame for decision making.

As a point of reference on how we manage our US Covered Call positions, I’ve provided a table below to show all of the Covered Call trades we have conducted over the last two months.

Learn more about Covered Calls

If you would like to know more about this strategy, trading in the US markets or to receive a Free guest pass to our Covered Call Scanning tools, CLICK HERE and register now.

 

Matthew Brown

 

Entry Date

Code

Stock

Closed Date

Gain/Loss per position*

November

17-Oct-12

APA

Apache Corp

8-Nov-12

-5.68%

18-Oct-12

SCO

ProShares UltraShort Crude Oil

1-Nov-12

4.92%

12-Oct-12

JOY

Joy Global Inc

1-Nov-12

2.87%

October

18-Sep-12

BTU

Peabody Energy Corp

23-Oct-12

9.00%

28-Sep-12

FSLR

First Solar Inc

19-Oct-12

5.53%

21-Sep-12

CNX

Consol Energy Inc

19-Oct-12

3.41%

27-Sep-12

AAPL

Apple Computers Inc

9-Oct-12

-1.87%

19-Sep-12

SCO

UltraShort Crude Oil

9-Oct-12

3.35%

19-Sep-12

NFLX

Netflix.com Inc

4-Oct-12

4.91%

18-Sep-12

UNG

United States Natural Gas

4-Oct-12

8.89%

September

21-Aug-12

AVP

Avon Products Inc

21-Sep-12

3.49%

14-Mar-12

RSX

Market Vectors Russia ETF

21-Sep-12

-3.18%

22-Aug-12

CHK

Chesapeake Energy

17-Sep-12

3.16%

20-Aug-12

CNX

Consol Energy Inc

17-Sep-12

3.35%

20-Apr-12

CMA

Comerica Inc

14-Sep-12

4.71%

20-Aug-12

CTXS

Citrix Systems Inc

14-Sep-12

3.80%

20-Aug-12

APC

Anadarko Petrol Corp

14-Sep-12

3.87%

August

20-Apr-12

XL

XL Group PLC

10-Aug-12

5.97%

17-Jul-12

XOP

SPDR S&P Oil & Gas Expl & Prod

8-Aug-12

3.52%

17-Jul-12

AIG

American International Group

8-Aug-12

3.62%

25-Jul-12

USO

United States Oil Fund

8-Aug-12

3.85%

19-Jul-12

CBG

CBRE Group Inc

7-Aug-12

5.45%

*Gains/Losses reflect a combination of Capital moves and option premium. Figures do not take into account brokerage or slippage.

 

Since 1998, Matthew has been involved in the Financial Services industry providing stock, option and CFD advisory services, trading advice, funds management and education services. Matt is an Authorised Representative of Halifax Investment Services, providing analysis and recommendations for trading Covered Calls in the US markets and using Exchange Traded Funds (ETFs) ...
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